Kaplan vindicated on Pinnacle – but not jumping back into the shares just yet

On March 27, our go-to tech sector investment analyst Irnest Kaplan came through to the CNBC Africa studio to explain why the 50% plunge in Pinnacle Group stock was unjustified. The shares had been hammered after allegations one of its directors had tried to pay a R5m bribe to secure a R165m contract from the SA Police. After trading at R25 before the scandal hit, two weeks ago the shares bottomed at R7.65. Now back at R14, those who showed confidence in mid-August have been well rewarded. But the price is still a long way off its previous levels. So is Kaplan buying? Not yet. He explains why in this interview. – AH

ALEC HOGG: Well the investigation into Pinnacles’ possible insider trading is still ongoing, but Irnest Kaplan, the MD of Kaplan Equity Analysts is on the line, to have a look at what happened in the last couple of weeks, in a company Irnest that you told us, on the 27th March, was worth sticking with. You said that after the share price had dropped by half that it was not accurate, the allegations that were being made, and at this point in time, if you held onto all of your shares or maybe even bought more.

IRNEST KAPLAN: Thanks Alec, yes, it’s been an absolute rollercoaster ride with Pinnacle over the past couple of months actually, and I’ve never been able to ascertain what the merits of the allegations were because I’m not a forensic expert or somebody who gets into that amount of detail. Just having analysed the company for almost a decade and having interacted with the people there, I never got the feeling that they got to where they did because of untoward dealings and corrupt practices. I’ve always wanted to give them the benefit of the doubt, when they were quite surprised at that initial allegation and I’m quite pleased that it’s turned out the way it has, but as you rightfully point out, we still have an insider trading investigation, which is underway. We will only know what the outcome of that is in due course, but the share is quite stable at the moment, and it’s quite pleasing for shareholders.

ALEC HOGG: Well, not as pleasing for the shareholders who bought in at around R25.00 before the scandal hit, if you take it that the scandal that hit and caused the share price to go from R25.00 down to even seven Rand or so. If that is now being put out of the picture, at the current share price of around R14.00, are you buying?

IRNEST KAPLAN: Well, look…personally I’m waiting and I would recommend to wait for the upcoming results presentation, to understand a little bit more about the weaker and softer result that we are going to see. Before I sort of make a view, because you can’t really tell what’s going to be the roadmap, let’s say, over the next year or two. Unless one really understands what impacts, other things are having at the company, not related to what we’ve been chatting about. Then your question is very valid. The share was between R20.00 and R25.00, now it is R14.00, yet there is going to be no case against them, for the attempted bribery situation, so why should it be, sort of, almost half the price? I think really, the reason is this shows you what happens when things like this happen. People sort of shy away from it and some investors would just say ‘we’re not interested in this company. We’ll go look elsewhere’.

ALEC HOGG: Yes, Irnest there are many issues in history or many examples in history. I was looking at two over the weekend that Warren Buffett was involved with. The one was American Express in 1964,  the Salad Oil King, and the other one was GEICO, which nearly went bust in 1976, and in both instances he said ‘these are good businesses that had a problem that was brought in and, in fact, was artificial’. In both instances, he made huge amounts of money. Might we be sitting in a similar situation here with Pinnacle, a good company that has been sold down too aggressively?

IRNEST KAPLAN: Yes, look at R14.00 I wouldn’t call it being way too aggressively sold down. I mean earnings are going to be in the region of around one-rand-seventy, which puts it on a PE of eight, which is in line with what’s been over the past five to ten years. In fact, it’s arguably had a lower PE than that, so I wouldn’t say it’s been punished beyond all recognition. At seven-rand it was, but I think that was just really a short-term reaction to news and potentially shorting the stock and a lot of future trading, but I think it will; personally, I think it will level out now and potentially rise slightly but then we’ve got to look at earnings. We’ve got to look at where the business is going but I don’t think that this is ridiculously low levels.

ALEC HOGG: Irnest Kaplan, the MD of Kaplan Equity Analysts, and if you were fortunate enough to get into the stock on the 18th August… If you were fortunate to get into the stock a few months ago you would have been able to get it at seven-rand-sixty-two. Well, that’s all from us here, in South Africa.